Will restricted lending limit capital growth in next few years

[evand]

Exactly my point here:

Tight credit might restrict new builds and developments but it doesn't restrict property (ppor & ip) going onto the market. Which is the majority of supply if the definition of 'supply' is property on the market.

the crux of this argument is that NEW supply is irrelevant as supply can come from existing stock?

 

[Ausprop]

I believe cutting NEW supply and not expecting price increases in cap values or yields (which are related anyway) is very unrealistic. the lead time for new subdivisions and apartments etc is quite long, so I guess time will tell

 

[Aaron Sice]

in WA and NSW it is, anyway....

 

[House_Keeper]

Hi Guys,

More coverage out today on the impact of credit rationing to the resi construction market in line with my thoughts above:

Building slump threatens buyers, tenants

This is another article quoting the builders association telling us we should be building more houses.

Nothing new there.

I don't think it will be anywhere as dramatic as they claim.

Immigration is going to fall over the next few years. Given the poor state of the NSW economy, I'm not that confident about Sydney.

It's not easy to see ahead with theses conflicting signals. The only thing that I'm confident about is stable resi property prices and decent rental growth. I don't expect rental growth to go through the roof. It cannot go much higher than wages growth over the long term.

Cheers,

 

[HomePage]

It's pretty simple IMO. Tighter lending equals greater deposit or equity credit required to secure a property. If this creates a supply problem (which for the life of me I can't see how) and prices go up, then you need even more deposit or equity credit to seal similar deals. Equity credit may be keeping pace, but those poor deposit savers, who represent the majority of entry level purchasers, will see that ever growing deposit getting away from them. Real demand will convert to pent up demand and thus will counter any decrease in supply. Self correcting problem - prices must return to acheivable levels.

 

[House_Keeper]

Originally Posted by evand
The only things driving demand over supply at the moment is record low interest rates and temporary govt stimulus which the effects of seem to be petering out a bit lately.

Hi Evand,

You're kidding right? What about record levels of immigration (increasing demand) and record low levels of building approvals (reducing supply). Put that in the context of already massive undersupply and you just get an escalating imbalance situation.

You're starting to sound like a property seminar presenter Michael!

I think evand is quite right, and not the only one who has observed that only the bottom end of the market showed any significant price growth after the government grants were announced. Its effects are slowing down, so there is a good chance this boost to the market can only be temporary.

The so-called massive undersupply has been mentioned for years, it doesn't explain what happened in the last 6 months.

Immigration is on the way down, not on the way up.

Banks are very reluctant to finance developers, most likely because they see it as a high-risk activity in a weak economy. I wouldn't bet that the banks are stupid in this assessment.

Cheers,

 

[J Martin]

Simple supply and demand economics. You reduce supply and simultaneously increase demand then the price for the good has no option but to increase. Whether its to buy it or rent it, the price is going up. In the face of constrained credit, it suggests more of the latter and less of the former.

Cheers,
Michael

Michael. Supply is not being reduced. It's just not increasing as fast as it was. For supply to reduce, you'd need to knock down houses. I do agree of course that demand is increasing through increasing population and other demographic shifts. It's not quite as black and white as you make it out to be though.

You are talking of scarcity in terms of supply and demand, yet this does not neccessarily lead to a increase in prices when these mismatch. Decreasing credit is an arguably stronger driver than the small mismatch in supply and demand.

 

[steveadl]

Equity credit may be keeping pace, but those poor deposit savers, who represent the majority of entry level purchasers, will see that ever growing deposit getting away from them.

Depends on your perspective. Exactly how hard is it for say a young couple to save a deposit for an entry level house? One of the girls working for me is signing the contract with her BF today for their first house. They've both been saving for a couple years and could easily get a loan for a house say $150-200k more than they've bought - and that's without and help from the FHOG (though they are using it of course).

Yes it may be harder if you want to spend like no tomorrow and only feel like saving $50pw. No debate there, but then I wouldn't pity these people. Now if on the other hand the girl working for me and her BF were still not able to afford to buy after saving well for a couple years - THEN I may feel sorry.

 

[Ausprop]

Banks are very reluctant to finance developers, most likely because they see it as a high-risk activity in a weak economy. I wouldn't bet that the banks are stupid in this assessment.

Banks don't like to lose - they don't care if their actions weaken the economy or drive house prices higher. Their refusal to lend - despite being granted a free ride by the govt with the bank gaurantees - will have major impacts.

I don't think the average citizen has an understanding of how bad the lending cessation or its consequences are. The lack of fanfare re the failure of Ruddbank is testimony to this.

 

[MichaelW]

Michael. Supply is not being reduced. It's just not increasing as fast as it was. For supply to reduce, you'd need to knock down houses. I do agree of course that demand is increasing through increasing population and other demographic shifts. It's not quite as black and white as you make it out to be though.

Fair enough, but I was talking about a "relative" reduction in supply and not an "absolute" reduction. i.e. Its reducing from its historic levels and this is resulting in an increasing gap between ongoing supply versus ongoing demand. And I added that at the same time as we're having a relative reduction in supply, we're having a relative increase in demand due to record levels of immigration.

The attached charts show what I'm alluding to, though these are now a tad dated, they are still fairly representative of what we're up against. This is not all smoke and mirrors from the residential construction sector. These charts are from an independent third party macro-economic analyst group who inform senior execs. No vested interest either way.

I used to work for Carter Holt Harvey as an exec, and we used to track dwelling commencements as a lead indicator of demand. I know where they used to track in a balanced market and I can tell you that they're tracking well below this level now which is exacerbating the under-supply situation. For me that's pretty black and white.

Cheers,
Michael.

 

[HiEquity]

MichaelW is quite right on this one.

The supply / demand balance is nothing to do with the number of properties on the market, IRs or anything like that. It just refers to how many dwellings are out there and how many people need to live in them.

The reality is that tightening finance will restrict new builds at a time of significant population growth so supply growth is decreasing at a time of above average demand growth for accomodation.

The restrictions of finance will restrict price growth of course for the same reasons that it is restricting new dwelling construction.

So the tightening supply / demand balance can only be reflected in one place - rental yields. While there will also no doubt also be an increase in the number of people per dwelling in response to the increases in rents, which will moderate the effect of course - but note rent increases come first, then people respond by moving in together. They wouldn't do that without a price signal first.

Of course, this may be completely irrelevant for our own particular IPs, where thousands of other factors come into play!

 

[Perp]

Tight credit might restrict new builds and developments but it doesn't restrict property (ppor & ip) going onto the market. Which is the majority of supply if the definition of 'supply' is property on the market.

I'm no economist (not that I like to brag ), but let's talk about this simplistically. Let's say that we need 10,000 more dwellings, to accommodate new households created by population growth, immigration, etc.

If we haven't built 10,000 new dwellings, then supply has tightened, relative to demand. The number of properties on the market relates to turnover, rather than supply (whilst acknowledging that they are usually correlated). If we need 10,000 extra dwellings, and 15,000 are put on the market, we don't have an excess of supply, because we now need 25,000 dwellings to house the people moving out of their old place, plus the growth.

Yes, rents will rise but my point is that tightening credit will not restrict supply, only demand.

Development credit seems even tighter than for established residential property, so I disagree. Many developers are scaling back plans for the next few years, so whilst absolute supply isn't dropping, it's certainly not keeping up with demand, and the relative under-supply will worsen over the next few years.

Lack of credit doesn't reduce demand, it simply "bottles" it as pent-up demand, and still impacts on prices.

Real demand will convert to pent up demand and thus will counter any decrease in supply. Self correcting problem - prices must return to acheivable levels.

I disagree. Pent-up demand can and does affect the market, even if much of that demand never manifests as a property purchase, because it affects other market participants. Investors, for example, who do have access to credit, will know that this pent-up demand is eventually going to translate to growth, and may invest more heavily in anticipation. Parents may decide to buy properties for their children.

You are talking of scarcity in terms of supply and demand, yet this does not neccessarily lead to a increase in prices when these mismatch. Decreasing credit is an arguably stronger driver than the small mismatch in supply and demand.

I agree that credit availability is a big factor, but I only see it affecting the timing of growth, not whether there is growth or not. The market can't sustain a large demand and low supply of credit for a long time. As the demand bottles up, the future prospects of residential housing will be perceived as stronger, lenders will feel less nervous about lending, and credit will appear. Or alternative mechanisms for buying will increase, such as "rent to own", deposit lending, shared equity with lenders, etc.

In summary, I have faith in the efficiency of the market. There is a need for an increasing number of dwellings. If we're not building dwellings at the same rate as demand is increasing, prices must eventually go up.

 

[lizzie]

totally agree ozperp. i've seen many times when demand was pent up because of external reason, and once the cap is released and explosion occurs.

waaaay back in the late 1970's in nz the government put a ban on wage increases to try and keep inflation under control. so wages didn't increase for a period of around 2 years. but the price of living increased so there was a huge pent up demand for wages to also increase. once the ban was removed wages doubled practically overnight.

same with banana's in 2007 when the nsw coastal crops were wiped out ... demand for banana's was still there but supply wasn't so they increased in price from around $3kg to $15kg in mere weeks.

and existing housing coming onto the market are not creating new supply - they are recycling. if a house came on the market, that would house one family, and it was knocked and two newbies were rebuilt, to house 2 families, then that is creating new supply ... but this "creating new supply" is the market that is getting knocked for 6 due to tightening credit.

 

[J Martin]

totally agree ozperp. i've seen many times when demand was pent up because of external reason, and once the cap is released and explosion occurs.

I think you would agree that a fair amount of demand has been brought forward by stimulus measures of late...possibly a bit of investor pent up demand, but certainly not FHB's.

On the topic at hand, the system requires a lot of new money in the form of debt to maintain the status quo and prices, year on year. Why? Because the vast amount of the price you think your house is worth doesn't exist as money. It exists as future debt that someone will take out to pay for your house. Because your neighbour took out a 500k loan to get the house next door, that was worth 250k 2 years ago(for example), your house becomes worth 500k. The 500k to pay that has to come from somewhere? It is not coming from cash, but 250k future debt(inflation erodes this of course). Which is why FHB are so important in the equation, as they represent significant new debt). The Updgrader has their existing house value + new debt. Part of this argument is why I believe house prices for the majority can't go much beyond what they are now, because the FHB is so important in the pyramid. I'd be interested in any opinions on this.

I'm not really a bull or bear in terms of where I think house prices are heading, but I just can't see the the reliberalisation of credit growth(boom) having a more significant effect that the current constraints on credit growth(bust).

 

[House_Keeper]

The attached charts show what I'm alluding to, though these are now a tad dated, they are still fairly representative of what we're up against. This is not all smoke and mirrors from the residential construction sector. These charts are from an independent third party macro-economic analyst group who inform senior execs. No vested interest either way.

Cheers,
Michael.

Thanks, that's quite interesting data. This is a lot more precise and useful that rhetoric.

It would be great to have something a bit more area specific.

I have read somewhere (Residex?) that NSW was one of the state with the worst housing shortage.

What is the basis for this data though. Isn't it based on an assumption that Australia "needs" about 170,000 new dwellings per year? How solid is that assumption? I remember vaguely seeing ranges from 150,000 to 180,000 dwellings required per year in various publications. There seems to be a broad range of guessing going on here.

Cheers,

 

[Token Funder]

Banks are still lending...it's how much and to whom that has changed. Unfortunately, people continue to compare what's possible now with what was possible over the last ten years. This is simply ignoring the fact that recent history was the aberration, not today.

And the partial return to more usual lending practice has and will have an impact on house prices (and consumer spending) insofar as it reduces the buying power of a significant cohort of buyers. For example, the buyer with a $25K deposit and the capacity to service, say, a loan of $475K, could get a 95% LVR at buy (excluding fees for the purposes of argument) a property worth $500K. At 90% LVR the same borrower with the same serviceability can only buy a property worth $250K.

For fun, pretend it's the '80s and do the maths on 80%.

Similarly, the investor with equity in another property is limited in the equity they can draw even before, as I suspect will happen, more restrictive LVR limits are placed on equity release in comparison to purchases .

 

[Project1080]

Anyone remember the words "Cycle" and "Supply and demand"?
Where in another one. House prices had their run, rents are now playing catch up, then prices will rise again.

The more things change, the more they stay the same. It's not different this time. Never has been, never will be. Human nature won't allow it to happen. Because we can't see the future, we look at the past and guess what? We just go with what we know.

Yes, there will probably be some new fad or gimmic to start it off, but the underlying principles do not change. Think Dutch tulips in 1600s (No, I wasn't there), "the 1800s Gold Rush" (wasn't there either), 1929 recession (or then), 1960s "nickel and dime boom" (Now I was), 1970s oil crisis, 1980s Stock Market crash, 1990s recession, 2000 tech boom, and 2008/09, the GFC.

It's all just a great big merry-go-round.

So, lending is a bit tight, building has slowed (esp apartments), the baby boomers are nearing retirement (for those who have any super left) and the Govt knows it has to do something to keep the country going, anything, and fast. Baby bonus, Super dabbled with (again), Pension age raised, then it will be increasing immigration. Even in this month's API I read that the Govt are letting small investors in on the rental affordability scheme.

Bernard Salt has said it previously and now Matusik is saying it. http://www.theaustralian.news.com.au/business/story/0,28124,25719474-25658,00.html
They won't even be able to build properties fast enough to keep up.

It won't happen overnight, but it will happen.

Project 1080.

The project: 10 IPs in 80 mths.

 

[housemute]

We're in another one. House prices had their run, rents are now playing catch up, then prices will rise again.

In the boom bust cycle - after a bust - do the items usually rally and continue from where they left off?

Tulips don't seem that expensive these days - did they substantially recover after the 1636 bubble?

Looking long term it would appear there is a bubble in house prices.

Do rents have to play catch up because based on the purchase price the return on the IP business is too low? Another way yield could improve would be for prices to drop and stay down. It would be of little comfort to all those with 'skin in the game' of course but that is one way it could rebalance itself.

 

[Ausprop]

look how long the tulip bubble took to deflate. why is that? because it was stupid. you can't live in it and they aren't very nice to eat. EDIT: and they aren't scarce and they diminish with time.

 

[yorke]

Does anybody has any evidence as to whether lending is now more restricted or any hint as to how long tighter lending might last?

I don't know about restricted lending but it certainly takes a lot longer then it used to do. I've just got LowDoc approved by Rams last week and it took them 3.5 weeks to approve it, and that's on 50% LVR , going directly through them and getting their valuer in 2 days after I got my application in. Just as well they've restricted lending or I would have had to wait until X-mas to have it approved.